Cheyenne Corporation leased equipment to Sage Hill, Inc. on January 1, 2020. The lease agreement called for annual rental payments of $1,250 at the beginning of each year of the 3-year lease. The equipment has an economic useful life of 7 years, a fair value of $8,000, a book value of $6,000, and Cheyenne expects a residual value of $5,500 at the end of the lease term. Cheyenne set the lease payments with the intent of earning a 7% return, though Sage Hill is unaware of the rate implicit in the lease and has an incremental borrowing rate of 9%. There is no bargain purchase option, ownership of the lease does not transfer at the end of the lease term, and the asset is not of a specialized nature.

Prepare all necessary journal entries for Sage Hill in 2020.

Date Account Titles and Explanation Debit Credit 1/1/20 Right-of-Use Asset Lease Liability (To record the lease) 1/1/20 Lease Liability Cash (To record lease payment) TO DO 12/31/20 Lease Expense Right-of-Use Asset Lease Liability